Indian economy set to enter 'Goldilocks' phase with 6.4% GDP

Indian economy is set for a 'goldilocks' period -- used to describe a time frame of high growth and low inflation -- while it can become Asia's fastest growing economy in 2016, Japanese financial major Nomura said.

The global financial services major is also optimistic about "productivity-enhancing reforms" in the country and estimated the GDP growth for 2015 at 6.4 per cent.

"We are positive on India's economic outlook in 2015. The key downside risks to our view are weaker global growth, higher commodity prices, a slower pick up in domestic capex cycle and a sharp reversal of capital inflows, especially debt inflows," Nomura Chief Economist Rob Subbaraman said.

"We expect India's real GDP growth to rise to 6.4 per cent in 2015, from 5.2 per cent in 2014, and further to 6.8 per cent in 2016," Nomura said.

Nomura's composite leading index for India suggests that the economy has already hit its trough and is in the early stages of a business cycle recovery.

"A Goldilocks period of lower inflation and higher growth lies ahead, in our view," Sonal Varma India economist at Nomura said adding "risks to India's outlook are more global than domestic."

On reforms, the global financial services major said there would be a continued and steady rollout of reforms but in a "piecemeal" fashion and not big bang.

"We expect reforms to focus on creating the groundwork for implementing a goods and services tax by April 2016; changes to the Land Acquisition Act; a reduction in government stake in public sector banks; a framework for auctions of natural resources; fiscal reforms and a longer-term strategy to improve railways and urban infrastructure," Nomura said.

"As productivity and capex improve and reforms forge ahead, we expect India's potential growth to gradually rise again to above 6.5 per cent in the next three to four years," Nomura said.

Despite our forecast of a solid economic recovery, the CPI inflation is likely to average around 5.5 per cent year-on-year in 2015, down from 7.2 per cent in 2014.

On rate cuts, the Japanese brokerage firm said that lower inflation would provide some room for policy easing in 2015. It expects 25 basis points rate cut in June and August 2015.

"We forecast 25 bps rate cut in only Q2 and Q3 2015, and then the Reserve Bank of India stays on hold until 2017," Nomura said.

Reserve Bank Governor Raghuram Rajan in its September policy review left all key rates unchanged citing continued risks to inflation and difficult external situation especially on the geopolitical front. RBI's next policy review meet is on December 2.